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Blog Posts & Articles  >  Pre-Qualification Needed To Finance A Business Purchase

Pre-Qualification Needed To Finance A Business Purchase

Needed To Finance A Business Purchase

The two-question form to "pre-qualify" for a bank loan to finance a business purchase gives buyers a false sense of security. The total pre-qualification process needs to be completed before an authentic commitment, usually in the form of a letter, can be issued to prospective borrowers. Some of the information that must be supplied to obtain a pre-qualification letter includes:

1. List of borrower assets and their value will be requested by the lender. This includes any equity in real property as well as the value of IRAs and other investments. An accounting of cash in the bank will be required with account statements to document the information listed. Whether or not these assets are liquid may impact on the borrower’s ability to raise cash to buy a business through a business lender. Standard Operating Procedures (SOPs) in SBA lending programs, for example, often require the majority of an individual’s liquid assets be invested in the business.

2. List of assets belonging to the applicant’s spouse, and their values, also needs to be provided.

3. Borrower’s resume is needed, as it describes the person’s business experience and abilities, giving the underwriting team an idea of whether she is likely to know how to run the business.

4. Other income involved. Lending officers want to know, when reviewing a pre-qualification application for funds to finance a business purchase, whether the borrower and the borrower’s spouse receive other income to help meet living expenses. This is important because business buyers have to prove they’ll have the money needed from the business as well as other sources, to satisfy the loan payments.

5. Living expenses of borrower and his or her household should be documented for the company being asked for a pre-qualification letter. Whether the borrower will be able to make loan payments can only be determined by knowing how much he’s spending for mortgage or rent, groceries and other costs of maintaining a household. That total is subtracted from the household income total to show how much will remain to support the debt payments.

5. Credit history is critical for pre-qualification. Has the applicant paid bills on time and satisfied other financial obligations? If there are outstanding debts not satisfied when due, the hopeful borrower may not be able to get the money requested when the time comes. One useful guide is that the entrepreneur’s Fair, Isaac Credit score should at least be in the low to mid-600s.

There is a danger of not submitting a full application for pre-qualification, when seeking a source for a loan to finance a business purchase. The problem is the applicant thinks she’s received a commitment letter that verifies her ability as a buyer when dealing with brokers and sellers. It will be an unpleasant surprise to discover the “instant pre-qualification” isn’t worth the paper on which it’s printed.

About The Author: For over 25 years Peter Siegel, MBA has provided niche business purchase financial advisory and loan broker services with SBA Loans, Non-SBA Loans, Retirement Plan Conversions, Hard Money, Gap/Bridge Financing, Note Restructures, etc. He assists with financing for: Business Purchases, Business With Real Estate Purchases, Franchise Resale Purchases, New Franchise Purchases, Pay Off Existing Seller Notes, Partner Buyouts, Employee Buyouts. Peter Siegel can be reached direct toll free at 888-983-1632 regarding getting professionally pre-qualified, advisory & loan placement services.

Categories: Business Purchase Financing, SBA Loans, Small Business Loans

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